my own medicine: my experience with the envelope system

“Eat your own dog food.”

That’s one of Google’s Golden Rules, along with “don’t be evil” and “encourage creativity”. It’s a good rule: don’t create a product that you yourself wouldn’t want. (Edit: I changed the title of this post to “my own medicine”, because I didn’t want people to get the wrong idea about the envelope method!)

Along those lines, it occurred to me late last year that if you want to help people set up financial systems, chances are high that you’re going to recommend the Envelope Method to at least some of them — paying actual cash for the things they buy, rather than just putting it on their plastic and trusting to fate and Visa to sort things out later. But if you’re going to recommend something as counter to today’s culture as paying cash, you’re going to lose all cred if you yourself haven’t at least tried it.

So, after a surprisingly brief conversation with my wife, we resolved that, come 2011, we would try out this magical, mystical “cash” thing for ourselves. Most of the monthly bills remained on the (paid-off-in-full-every-month) American Express Blue Cash, as did some other variable spending items like fuel, but things like groceries, eating out, entertainment, clothes, household items — those all went into the envelopes.

It was probably one of the best decisions I made all year.

It makes sticking to a budget ridiculously easy. This is the “well, duh” one, but it’s true: you don’t have to rely on spreadsheets or your memory. If you want to buy something, just look in the envelope; if you don’t have the money, you don’t buy the thing. If we decided that we wanted to eat out a little more in a given month, we simply made a joint decision to move some money from one of the other envelopes. That’s fine — as long as the total in cash is the same, we don’t have to worry about eating into our bills or our Car Fund or going into debt.

It doesn’t mean you can’t shop online. Groupon accounts for a decent amount of our restaurant and entertainment budget. If we saw a Groupon we liked, we took the money out of the appropriate envelope, put it in the “deposit” envelope, and bought the Groupon. The contents of the deposit envelope were considered “spent”, and would be deposited back into our checking account the next time we went to the bank.

It’s more fun than you think! There’s something just plain fun about doing things differently from other people. Going to the bank and withdrawing your spending money for the entire month. Paying for a $50 (or $100!) pair of shoes in cash. Holding off on that impulse buy because you don’t have the envelope with you. Explaining to your friends just what the heck you’re doing with those envelopes full of greenery. Novelty is fun!

It empowers the non-finance-geek. In most households, there’s a finance geek and a non-finance-geek. In many, the geek ends up tearing their hair out trying to figure out how to get the non-geek to really internalize the budget. In extreme cases, the non-geek simply has no concept of a dollar; they nod and smile when the geek presents the budget, then go out and buy whatever they want, confident that the geek will figure out a way to make it work. The Envelope Method, however, is easy to internalize: you have the money, or you don’t. Suddenly, a twenty-dollar meal has a much more physical meaning — that’s one Andrew Jackson that you won’t be seeing again! In our house, once we set up the initial budget, I pretty much let Liz handle the envelopes — I ask for her permission before I take money out of one, or move money around, or what have you. Let me tell you: we’ve tried out several spending systems since we got married, and this has far and away been the least stressful.

In fact, I recommend everyone try the envelope method. Pick one spending category that you want to control — eating out, books, whatever it is — and force yourself to pay for anything in that category in cash. If you like it especially well, try expanding to other spending categories. At the very least, you’ll have that one category under control — and a handy tool in your personal finance toolbox to use later, as well.

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